Unemployment, benefits and household spending: new evidence from UK bank account data

The risk of a worker falling into unemployment represents one of the most important threats to the stability of households' finances -both in terms of lower spending (and hence living standards) and in terms of a greater degree of financial distress (such as the accumulation of unmanageable debt or missed bill payments).Providing households with some degree of insurance against these risks is a crucial function of benefit systems.However, relatively little is known about how spending and financial distress evolve following job loss in the UK and the role played by the benefit system -which, by international standards, provides comparatively little protection against unemployment, on average.Drawing on a dataset of anonymised bank account transactions, this report provides new evidence on how workers' finances respond to unemployment.Using a sample of more than 10,000 job losses occurring between 2018 and 2023, we trace changes to spending, credit usage and financial distress during unemployment, exploring how these responses vary according to the amount of support afforded by the benefit system. Key findings1. On average, newly unemployed people claiming unemployment benefits had previously been earning around £1,800 per month (after tax) while in work.When earnings disappear at job loss, total benefits rise by around £600 per month, implying a total income decline of about £1,200.In response, the newly unemployed reduce their spending by around £550 per month.Spending (and hence, presumably, the living standards of households) declines rapidly following job loss, even during spells of unemployment that last only a few months.However, that the average fall in spending is only around half as large as the average reduction in income implies that the recently unemployed are able to draw on other resources to prevent their spendings from falling by more.2. Spending declines across several categories of goods.There are declines not only in 'discretionary' spending (such as on leisure activities), but also in spending more likely to be associated with 'basic' goods.Supermarket spending falls on average by 16% during unemployment, while spending on bills falls by 13%.Unemployment, benefits and household spending: new evidence from UK bank account data © The Institute for Fiscal Studies, January 20263 3.After six months of unemployment, the share of people making rental payments has fallen by 16% while the share making an energy bill payment has fallen by 8%.Missed bill payments of this kind suggest that, for at least some households, unemployment represents a period of acute financial distress.4. Evidence on the use of credit by the recently unemployed is mixed.The share of people incurring overdraft charges increases by around 4% (from 16.0% to 16.6%) during unemployment, while the number registering a negative current account balance increases by 8% (from 22.1% to 23.8%), both indicative of financial distress.On the other hand, credit card interest payments and new payday loans fall during unemployment, possibly reflecting reduced access to or willingness to use credit.5. The design of unemployment benefits in the UK means that replacement rates (the share of in-work income that a worker receives out of work) can vary drastically between individuals.For the third of our sample with the lowest replacement rates, total income (including both earnings and benefits) falls by around 90% and spending by 26%.For the third of our sample with the highest replacement rates, income falls by around 30% and spending by just 6%. 6.Those with the lowest replacement rates run down their savings more heavily and for longer in the early months of unemployment.Missed bill payments are also significantly more common for them, with the share making an energy bill payment falling to about 20% below its pre-job-loss level.That compares with just 3% for the third of our sample where the benefit system provides the highest replacement rates.Unemployment, benefits and household spending: new evidence from UK bank account data